QUANTIFYING THE FINANCIAL IMPACT OF OCCUPATIONAL INJURIES AND

ILLNESSES, AND THE COSTS AND BENEFITS ASSOCIATED WITH AN ERGONOMIC RISK CONTORL INTERVENTION WITHIN THE UNIPRISE

BUSINESS SEGMENT OF UNITEDHEALTH GROUP

by Sarah L. Warch

A Research Paper

Submitted in Partial Fulfillment of the Requirements for the

Master of Science Degree With a Major in

Risk Control

Approved: 3 Semester Credits

_________________________ Investigation Advisor

The Graduate College University of Wisconsin – Stout

July, 2002

i

The Graduate College

University of Wisconsin – Stout Menomonie, Wisconsin 54751

ABSTRACT

Warch Sarah L. (Writer) (Last Name) (First) (Initial) QUANTIFYING THE IMPACT OF OCCUPATIONAL INJURIES AND ILLNESSES, AND THE COSTS AND BENEFITS ASSOCIATED WITH AN ERGONOMIC RISK COTNROL INTERVENTION WITHIN THE UNIPRISE BUSINESS SEGMENT OF

UNITEDHEALTH GROUP (Title)

Master of Science in Risk Control Dr. Elbert Sorrell July, 2001 59 (Graduate Major) (Research Advisor) (Month/Year) (Pages)

Publication Manual of the American Psychological Association, 4th ed. (Name of Style Manual Used in this Study)

The Uniprise business segment within UnitedHealth Group has experienced

considerable direct costs associated with occupational injuries that have impacted overall

profitability since 1999, with 44% of the total cost driven by cumulative trauma disorder.

A clear, standardized method of quantifying the financial impact of injury is critical to

effectively propose and gain support for a risk control initiative focused on the reduction

of cumulative trauma injuries within Uniprise. Currently, UnitedHealth Group has

neither a formal system to effectively quantify direct costs associated with occupational

injury and illness nor a formal financial model to estimate the costs and benefits

associated with risk control initiatives.

The methodology used to accomplish this study included identifying and

quantifying the historical cost of occupational injury and illness, translating related costs

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into impact on profitability, projecting the estimated costs associated with an ergonomic

program intervention, and applying UnitedHealth Group’s cost-benefit financial model to

estimate the return on an ergonomic risk control initiative.

The literature reviewed the types of related costs to be considered, methods of

translating costs into business terms, cost and benefit statistics associated with ergonomic

interventions, and financial cost-benefit models to project return on investment.

The first goal of this study was to conduct an analysis of Uniprise workers

compensation claims to determine the number, total cost, and distribution of claims as

they relate to the Uniprise business segment. Based on the distribution and cost of claims

by injury cause, a risk control intervention focused on reducing cumulative trauma

disorders within the Production and Service divisions would have the greatest impact on

the costs associated with occupational injuries and illnesses occurring within the Uniprise

business segment.

The second goal of this study was to quantify the operational impact of

occupational injuries and illnesses by translating costs into impact on profitability within

the Uniprise. Using 2001 as an example, $7,297,382 in additional revenue was required

to compensate for Uniprise occupational injuries and illnesses occurring that year. While

substantial, in addition to showing impact on revenue, the cost of occupational injuries

and illnesses in terms of impact on productivity would provide a more meaningful

business measure.

The third goal of this study was to estimate the costs and benefits of an ergonomic

risk control intervention and apply those estimates to a financial model to determine the

return on investment associated with the intervention. Based on the positive return on

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investment resulting from the application of the UnitedHealth Group Cost-Benefit model,

a formal ergonomic risk control intervention would be a profitable investment for

Uniprise.

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Table of Contents

Abstract ................................................................................................................................ i

Table of Contents............................................................................................................... iv

Chapter 1, Statement of the Problem .................................................................................. 1

Introduction............................................................................................................. 1

Purpose of the Study ............................................................................................... 3

Goals of the Study................................................................................................... 4

Background and Significance ................................................................................. 4

Definitions............................................................................................................... 5

Summary ................................................................................................................. 5

Chapter 2, Review of Literature.......................................................................................... 7

Defining Accident Costs ......................................................................................... 7

Injury and Illness Data Sources ............................................................................ 16

Analyzing Loss Data............................................................................................. 19

Valuing Loss in Business Terms........................................................................... 20

Estimating the Costs and Benefits of Risk Control .............................................. 20

Financial Models to Value Risk Control Initiatives ............................................. 23

Summary ............................................................................................................... 25

Chapter 3, Methodology ................................................................................................... 27

Method of Study ................................................................................................... 27

Outline of Methodology........................................................................................ 27

Chapter 4, Results and Discussion.................................................................................... 31

Summary of Methods Used .................................................................................. 31

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Target Population.................................................................................................. 31

Workers’ Compensation Loss Trend Analysis ..................................................... 32

Administrative Cost Assessment .......................................................................... 37

Cost-Benefit Analysis ........................................................................................... 38

Results................................................................................................................... 42

Summary ............................................................................................................... 44

Chapter 5, Summary, Conclusions, and Recommendations ............................................. 45

Summary ............................................................................................................... 45

Conclusions........................................................................................................... 47

Recommendations................................................................................................. 50

References......................................................................................................................... 53

Appendixes ....................................................................................................................... 58

1

Chapter 1

Statement of the Problem

Introduction

In August 1998, UnitedHealth Group underwent a major reorganization in an

effort to reduce the operating cost run rate by 10%, or $300 million, by the end of 2000.

In order to manage operating costs more effectively, the Company focused its efforts on

rethinking all expenditures, realigning the organization to eliminate duplication,

streamlining operations, and introducing new technology to minimize manual tasks. The

reorganization further developed specialization within each business segment and shifted

a substantial portion of claims management and customer service functions within the

Company to the Uniprise business segment.

Today, Uniprise is the largest subsidiary of UnitedHealth Group, comprised of

approximately 10,152 employees nation-wide, out of a total of 29,845 employees within

UnitedHealth Group. Uniprise is a health care service provider for large, multi-site

employers with over 5000 employees, and also provides management and service

functions for other organizations in need of technology and unique transactional support

for complex health care services needs including member enrollment, eligibility, claims

management and customer service. Uniprise currently manages more than 240 large,

multinational customers including 134 Fortune 500 companies and 50 Fortune 100

companies. Uniprise established a segment goal of reducing expense run rate by $24

million during the year 2001 (Bahl, 2002). Uniprise missed the cost control target by an

estimated $7 million for the full year, creating a larger burden to achieve 2002 financial

commitments (Bahl, 2002).

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Efforts toward reducing operating costs have been particularly daunting given

recent economical conditions. The economic downturn that climaxed in 2001 is expected

to continue into 2002 and the US Gross Domestic Product (GDP) is expected to slow to

1% (Bahl, 2002). Uniprise expects that meaningful corporate profitability improvement

will be stalled until at least the third quarter of 2002 (Bahl, 2002). In response to the

events of September 11, 2001 and the Enron scandal, it is also anticipated that material

layoffs will continue during the first half of 2002, leading to increased unemployment

along with the possibility of new large employer bankruptcies and increased mergers and

acquisition activity.

Uniprise anticipates greater impact from the continuing economic downturn than

other UnitedHealth Group businesses because of its supplier base and customer

population. For example, Uniprise currently serves over 600,000 airline employees and

dependents, a sector that has been severely impacted over the last two years. Uniprise

endured layoffs of over 400,000 insured individuals and four client bankruptcies during

2001. Additionally, as a health care company, Uniprise is also directly impacted by

annual double-digit increases in medical costs. Rising benefit costs, increasing economic

pressures and softer labor markets continue to drive large employer focus more heavily to

cost, resulting in a shrinking large employer health benefits market.

Over the past several years, the traditional claims management/call center

environment has transitioned to a workplace driven by technology and increased

production. With the development of the Internet and computer technology, work

demands have changed dramatically. Advanced computer programs allow Uniprise

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employees to handle higher production goals while still maintaining quality. The

increase in work demand has resulted in an increased risk for cumulative trauma injury

associated with performing highly specialized, repetitive tasks over a minimum of an

eight-hour workday. As a result, Uniprise experiences considerable direct costs

associated with occupational injuries that impact overall profitability.

It is widely accepted that removing or controlling identified safety and health

hazards in the workplace, can result in savings from fewer lost workdays, improved

productivity, improved work quality, increased worker morale and job satisfaction, lower

workers’ compensation and medical costs, and reduce risk for Occupational Safety and

Health Administration (OSHA) fines and litigation. Risk control decisions have become

more difficult given today’s operating environment and the focus on economic impact.

While the speculation of potential benefits may provide limited support, currently,

UnitedHealth Group does not have a formal system to cost justify risk control initiatives.

To effectively propose and gain support for a risk control initiative focused on the

reduction of cumulative trauma injuries within Uniprise; it is necessary to establish a

clear, standardized method of quantifying the financial impact of injury.

Purpose of the Study

The purpose of this study was to develop a comprehensive, business-based cost

impact analysis focused on cumulative trauma disorder that adequately represents the

direct cost of injuries to Uniprise and can be used in conjunction with a cost-benefit

model to determine the financial feasibility of a formal ergonomic intervention within the

Production and Service divisions of Uniprise.

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Goals of the Study

The goals of this study include the following:

1. Conduct an analysis of Uniprise workers compensation claims to determine

the number, total cost, and distribution of claims as they relate to the Uniprise

business segment, focusing on cumulative trauma disorder within the

Production and Service divisions.

2. Quantify the operational impact of occupational injuries and illnesses by

translating costs into impact on profitability within Uniprise.

3. Estimate the costs and savings of a formal ergonomic intervention within the

Production and Service divisions of Uniprise and apply those estimates to a

cost-benefit model to project the return on investment.

Background and Significance

Since 1999, Uniprise has contributed over 33% of the total number of workers’

compensation claims that have incurred costs within UnitedHealth Group and over 41%

of the total cost of claims, accounting for $4,909,453 in developed, direct costs. Of the

total contribution, 36% of reported claims and 44% of the total cost can be attributed to

cumulative trauma disorder, accounting for $2,143,558 in developed, direct costs. Two

primary divisions within Uniprise, Production and Service have contributed 45% of

claims reported, accounting for $2,497,682 or 51% of the total developed cost of injuries

and illnesses.

The Production and Service divisions of Uniprise present significant risk factors

for cumulative trauma disorder, most predominantly the highly repetitive nature of claims

management and customer service activities. As Uniprise continues to refine its key

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business processes to reduce operating costs, fewer employees will be expected to

contribute greater productivity, while maintaining or improving quality, further

increasing the risk for injury.

Definitions

Fortune 500 - America's largest 500 corporations by sales, profits, assets and

market share.

Fortune 100 - America’s largest 100 corporations by sales, profits, assets and

market share.

Gross Domestic Product (GDP) - The market value of all goods and services

produced in a year within the borders of the United States.

Developed Costs – The change, over time, in the reported number or cost of

claims for a particular accident year, policy year or injury year associated with

maturation time and reporting lags. Development factors are based on industry

actuarial studies.

Summary

Historically, UnitedHealth Group and Uniprise have employed a reactive

approach to risk control, based on the direct cost of risk. While workers compensation

costs are allocated to each business segment on an annual basis based on past experience,

the impact has not been sufficient to incite formal preventive action. A clear,

standardized method for quantifying the direct cost impact of occupational injuries is

critical to the cost-justification of risk control intervention processes within UnitedHealth

Group and the Uniprise business segment. The financial impact of occupational injuries

and illnesses must be quantified in business terms to effectively illustrate the impact on

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operating costs and the bottom line. To align risk control with other company operations,

proposed interventions must be analyzed by the same financial model applied to all other

operational capital expenditures.

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Chapter 2

Review of Literature

Defining Accident Costs

The study of the cost of occupational accidents began with H.W. Heinrich during

the 1920s. Heinrich (1959) was the first to argue that the cost of accidents was grossly

underestimated in that most accident costs are hidden . Heinrich also claimed that

indirect costs such as lost productivity and repair and replacement costs far exceeded

direct costs of an accident including medical expenses and insurance compensation.

Since Heinrich, researchers in the field of risk control have long supported that the

ultimate cost of an accident largely exceeds the obvious direct costs such as medical

expenses and premium costs, typically associated with workers compensation insurance.

Over the last several decades, the concept of defining and categorizing costs has

evolved and become more diversified in an effort to raise employer awareness and

motivate more aggressive risk control efforts. According to Dorman (2000), the most

recent upsurge in interest can be attributed to several factors. First, businesses have

begun to recognize that damage to workers has at least an enterprise-wide impact and

potentially an impact on whole economies. Recognizing these collateral consequences

bas begun to influence the expectation for risk control improvements. Second, key

decision-makers within businesses respond to economic motivation. Applying an

operationally based economic cost structure to risk control will allow related

interventions to mirror the management decision-making process. Finally, the economic

cost of occupational injury and illness has become a competitive factor in the global

marketplace.

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Today, research supports a wide variety of alternative cost allocation systems that

classify consequences in a variety of ways including economic or non-economic, direct

or indirect, and internal or external (Dorman, 2000). Recent studies also further define

the cost of workplace injuries and illnesses by consequences to the worker and

consequences to the employer. Yet another emerging theme focuses on the social

consequences of occupational injuries and illnesses.

Economic or non-economic costs. Categorizing occupational accident costs as

economic or non-economic encompasses the causes and consequences of, “the role of

economic factors in the etiology of workplace ill-health and the effects this has on the

economic prospects for workers, enterprises, nations and the world as a whole” (Dorman,

2000). It is therefore one of the more broadly defined classifications of the costs of

occupational accidents. The significance of the economic or non-economic cost

distinction is that it develops the case for risk control intervention independently, without

consideration of ethical or societal considerations.

In general, non-economic costs are those that cannot be cannot be objectively

quantified and captured as a monetary value. Dorman (2000) defines non-economic costs

as predominantly the “human cost of ill-health or premature death such as, pain, fear and

loss suffered by the victims, their families, and their immediate communities.” Several

studies report that disabling injuries, illnesses and fatalities can have profound human

consequences however very few attempts have actually been made to quantify the impact

of non-economic costs. Dorman (1996) critiques those efforts that have made to place a

monetary value on the human cost of accidents such as the pain and suffering, loss of

function, diminished quality of life, and premature death and states that ultimately, no

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number is accurate for related losses that cannot be objectively quantified. However,

understanding the scope of the non-economic costs of injuries and illness is critical to

anticipate and measure the full impact of workplace accidents.

Conversely, economic costs are those that can be calculated and expressed in

monetary terms, but don’t necessarily result in financial outlays. As such, the economic

costs of injury and illness are more easily isolated and quantified. Within the realm of

economic costs, several distinctions can be made between social or private costs and

financial or implicit costs (Dorman, 2000). Distinctions can also be made between costs

that are relatively constant regardless of the degree of injury or illness and those that are

variable, which contributes to the economic incentive to reduce incidence or severity

rates (Dorman, 2000). Overall, economic costs span all other classification of accident

costs and include elements from each. At the same time, all other classifications of

accident costs include elements of economic and non-economic varieties.

Direct and indirect costs. The most widely accepted and applied method of

categorizing loss relates directly to Heinrich’s concept of “hidden” costs and defines

losses as direct or indirect. While the theoretical concept of direct and indirect costs has

remained relatively consistent over the years, it is clear that each author draws this

distinction somewhat differently. For example, Simonds and Grimaldi (1956) supported

Heinrich’s claim that indirect costs are large relative to direct costs but argued that may

costs defined by Heinrich as direct are actually indirect. Ven Den Raad (1999) broadly

defines direct costs as those that are directly associated with the accident such as

investigation costs, production downtime, medical expenses, damage to equipment or

product, sick pay, repairs, legal costs, and court fines. He defines indirect costs as those

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that are indirectly linked to the accident such as employers and public liability claims,

business interruption, product liability, training of replacement staff, loss of goodwill,

and loss of corporate image. Klen (1989) further differentiated direct and indirect costs

as: (a) primary direct costs, or payments required by law to compensate and indemnify

injured workers, (b) secondary direct costs, or other payments to either the injured worker

or the government, and (c) indirect costs, or costs that are inferred but do not have direct

financial consequences.

According to Dorman (2000), in general, if the amount of a cost and its cause is

automatically reported in a business’s routine accounting system, from a managerial

perspective, it can be considered direct. Alternatively, if a cost cannot be quantified and

allocated in terms of an extra expenditure of time and resources, it can be considered

indirect. Looking at it in a broader scope, indirect costs are those costs that are not

classified as direct. Ultimately, the division of direct and indirect costs primarily depends

on the accounting system the business uses. A more sophisticated accounting system will

more broadly define direct costs while a less sophisticated accounting system will more

broadly define indirect costs.

Estimates of indirect costs as a proportion of direct costs have ranged from 1:1 to

20:1, depending on the type of industry and methodology used (Head and Harcourt,

1997). While it’s widely accepted that the ultimate financial consequences of indirect

costs exceed those of direct costs, they are rarely included in a cost impact analysis for

several reasons. First, indirect costs can be difficult to identify, value and quantify,

resulting in considerable time and effort spent. Second, standard accounting methods are

biased toward “hard” asset valuation such as property rather than “soft” asset valuation

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that indirect costs propose (Blair, 1995). Finally, cost allocation is often applied across

business units by payroll rather than actual claim experience, making it difficult to

establish a clear cause-effect relationship (Hopkins, 1995).

Internal and external costs. The cost of occupational injuries and illnesses can

also be classified as internal or external to the organization. Dorman (2000) defines an

internal cost as one that is generated and paid by the business and an external cost as one

that results from the business activities but is paid by parties external to the business such

as the injured worker, family and friends, and the surrounding community. Internal costs

include direct costs such as workers’ compensation insurance, medical expenses and

damaged property as well as indirect costs such as lost production, retraining and

litigation. Examples of external costs include the injured worker’s current and future lost

wages that are not replaced by workers’ compensation, medical expenses not

compensated through employer-paid insurance, lost household productivity,

environmental contamination and lost productivity to society (Dorman, 2000). A large

portion of the economic costs of injuries and illnesses do not fall on employers but rather,

are paid by workers, their families and their communities.

Some potential external consequences such as environmental contamination are

highly regulated and must be considered by businesses that pose such hazards. However,

most external costs may or may not be considered by businesses and provide a conflicting

interest between businesses and the wider community. According to Dorman (2000),

cost externalization presents more of a problem under certain market conditions including

a high degree of market competition, periods of higher unemployment, and a financial

market that supports risk transfer and social insurance programs. Dorman states that

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determining internal and external costs is significant in that it defines the gap between the

economic incentive to the individual decision-maker and the corresponding incentive to

society. While perhaps most of the costs associated with occupational injuries and

illnesses are external to the employer, they are generally not considered in the general

accounting practices used today.

Worker costs and employer costs. Similar to internal and external costs, a more

recent division of occupational costs associated with injuries and illnesses is the

distinction between costs to the injured worker and costs to the employer (Boden et al.,

2001). Employer costs essentially mirror the internal costs previously defined. Costs to

injured workers include economic and non-economic consequences to themselves and

their families. Recent studies support that much of the economic and non-economic

burden of the total cost of injury and illness for workers and their families results in

economic burden to the injured worker (Boden and Galizzi, & Reville,1999, 1999).

Reville, Bhattacharya, and Sager Weinstein (2001) estimate that injured workers who

lose at least a week of time away from work or suffer permanent disabilities lose over

$10,000 in earning capacity. Marquis and Manning (1999) estimate the lifetime cost of

disabling injuries to be over $31,183. Weil (2001) points out that recent estimates

account for only a minor portion of an injured workers total cost when medical and other

costs that cannot be measured in monetary terms are considered.

Dorman (2000) identifies several social factors that increase a worker’s risk for

occupational injury and illness which impacts the ultimate economic burden including

precarious employment, work in small and medium companies and working groups that

are subject to discrimination and marginalization. Precarious employment refers to

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contingent employment options such as temporary employment, leased employment,

consultation or outsourcing arrangements, part-time employment, multiple site

employment or a combination (Dorman, 2000). There has been a significant increase in

precarious employment arrangement in developing countries in the last several decades

suggested to be associated with technological advances, increased international

competition, new patterns of consumer demand and changes in government policy

(Quinlan, 1999). Dorman states that precarious employment arrangements weaken the

claims that employees can make against employers due to the tenuous relationship that is

established. Quinlan shows that precarious employment is linked to increased risk

associated with less training, less awareness of worker rights, poorly defined employer

relationships, pressure to maximize output and little input into work conditions.

Dorman (2000) states that small and medium sized enterprises are likely to have

greater risk for occupational injury and illness due to the fact that smaller firms have

smaller revenue bases over which costs can be distributed and generally experience a

more competitive financial environment. Therefore, risk control interventions that

significantly impact overhead costs are less likely to be prioritized.

Lastly, Dorman (2000) suggests that groups that have lower socioeconomic status

are likely to experience more hazardous working conditions. Studies have confirmed that

racial and ethnic minorities in the U.S. have higher accident rates (Loomis, Richardson,

Worf, Runyan, and Butts, 1997) in addition to immigrants (Bollini and Seim,1995),

workers with less education and low income (Robinson, 1988). In summary, those who

experience the poorest working conditions are likely to bear other social and economic

costs.

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To further quantify the impact, Keogh, Nuwayhid, Gordon, and Gucer (2000)

conducted a study to look at the outcomes associated with workers who had experienced

cumulative trauma disorders and filed workers compensation claims. At 28 months past

the initial claim filing, about half of the interviewed claimants reported that symptoms

continued to be severe enough to interfere with work, home activities or sleep. Over 80%

reported decreased functionality and 38% indicated that they had been laid off, fired or

quit the job they had at the time of the injury. Lastly, 84% reported having at least a

portion of their medical care paid for by workers’ compensation however a third of

respondents were required to borrow money to supplement or pay for medical treatment

(Keogh et. al., 2000).

Social consequences of injuries and illnesses. According to Dembe (2001), while

most outcome studies of occupational injuries and illnesses tend to focus on direct

economic costs such as workers’ compensation insurance payments, incurred medical

costs and the duration of work disability, there is an increasing body of literature focused

on researching social consequences. Verbrugge (1997) states that social consequences of

injury and illness can be expressed in terms of the impact on the affected person’s ability

to engage in major social role activities including work, parenting, caring for family

members, and contributing to the community. Dorman (2000) describes social costs

more comprehensively as the sum of all costs of worker injury or illness. It is

collectively agreed that while the social consequences of injury and illness most directly

affect the injured worker, the ultimate impact extends to family members, coworkers,

health care providers, insurance companies, courts and the local community at a

minimum (Dembe, 2001).

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The social consequences of occupational injury and illness are difficult to define

and quantify due to the overlap with economic and clinical consequences and the

interdependencies they create. To illustrate the complexities of these interdependencies,

Dembe (2001) developed a comprehensive table categorized by who is affected, the

corresponding societal role, where the impact occurs and potential effects. Examples of

affected individuals and groups include the work environment, family and friends, and

the surrounding community. Examples of societal roles include vocational, domestic,

leisure, recreational, civic, political, religious, economic, educational, professional,

biological and cultural. Examples of where the impact occurs include workplaces,

hospitals and clinics, homes, neighborhoods, churches, schools, stores, businesses, courts,

prisons and social care agencies. Lastly, examples of potential effects include vocational

function, psychological and behavioral responses, social effects, and physical status or

limitations.

These complex and mutually dependent interactions have made it difficult for

researchers to study the impact of the social consequences of injury and illness. Analyses

that have been completed are likely to be fragmented and based on the investigator’s

ability to isolate social impacts. For example, Keller (2001) limits the study of social

consequences to data derived solely from worker ratings, excluding dollars or clinical

instrumentation.

In addition to the reciprocal relationships defining the social consequences of

injury and illness is further complicated by several factors including consideration of the

magnitude and severity of the disorder, sociodemographic factors such as age, gender,

race, ethnicity; nationality, education and socioeconomic status and the course of medical

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care interaction throughout the injury or illness duration (Dembe, 2001). All of these

factors combined make translating the social consequences of injury and illness into an

economic format challenging.

Injury and Illness Data Sources

Recent advances in research pertaining to the costs and consequences of

occupational injuries and illnesses have been substantially driven by the availability of

more complete data sources (Reville, et al., 2001). Given the broad range of cost

classifications presented in today’s literature, it has become increasingly important to

clearly define and accurately estimate the costs and consequences of injuries and illnesses

related to a specific risk control intervention. Valid cost impact analyses require

sufficient data for statistical significance however, data sources for obtaining injury and

illness statistics are often limited in terms of the type and scope of information they

provide. Using data from multiple sources may produce a more thorough and credible

cost impact analysis. Injury and illness data sources can be generalized into thee basic

categories: (a) administrative data, (b) primary data and (c) national databases (Reville, et

al., 2001).

Administrative data. The primary data source for direct cost information

pertaining to occupational injury and illness is workers’ compensation administrative data

(Reville, et al., 2001). An advantage to using workers’ compensation data to value the

cost of occupational injuries and illnesses is that the data is readily available as

governments and insurance companies collect the information on a real-time basis.

Additionally, workers’ compensation data generally contains more comprehensive detail,

corresponding to an entire population of claims versus a selected sample. There are also

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several disadvantages to workers’ compensation administrative data. According to

Biddle, Roberts, Rosenmann, and Welch (1998), up to 40% of workplace injuries are not

reported as workers’ compensation claims. More specifically, Rosenman, et al. (2000),

found that in a survey of 1598 workers reporting known or suspected cumulative trauma

disorder, only 25% filed for workers compensation. Of the 75% who did not file a

workers compensation claim, only 20% reported their injury was not work-related,

resulting in a significant underestimation of data. Additionally, data often presents

limited demographic information and outcome measures limited to benefits paid. Lastly,

workers’ compensation data fails to account for the waiting period before benefits ensue

and also often fails to account for restricted work activity time as well as subsequent

uncompensated time away from work due to the injury or illness (Reville, et al., 2001).

Primary data. Another method of amassing cost information associated with

occupational injury and illness is through primary data collection. Primary data

collection refers to employing direct employee survey and questionnaire techniques

focused on gathering incident specific information (Reville, et. al., 2001). The advantage

to primary data collection is the ability to collect very detailed information including

costs that would typically be classified as indirect, non-economic, worker related and

social, over a specified period of time (Hensler, et al., 1991). However, primary data

collection is rarely a viable option on a large-scale due to certain characteristics inherent

to occupational injuries and illnesses including their rarity and complexity. For example,

according to Reville, et al. (2001), a sample of 300 workers with occupational injuries in

a year would require that 10,000 households be surveyed. Primary data collection is

more suitable for a more limited population as more extensive application is challenging.

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National databases. There are four national database resources most often used to

gather injury and illness information pertaining to American workers. The U.S. Bureau of

Labor Statistics (BLS) Annual Survey is a Federal and State program that collects

recordable injury and illness data from private industry establishments on an annual basis

including representative information from employers normally exempt from maintaining

the OSHA 300 summary logs (U.S. Bureau of Labor Statistics, 2001). The resulting

survey estimates of occupational injuries and illnesses are based on a selected probability

sample, rather than a census of the entire population. The BLS states that the relative

standard error is used to calculate a confidence interval of 95%. The National Traumatic

Occupational Fatalities (NTOF) identifies occupational injury fatalities based on death

certificates from each state and provides descriptions of causes of death and comparison

of rates among industries and occupations as well as trends over time. The National

Institute of Occupational Safety and Health (NIOSH) Division of Safety Research uses

NTOF data to perform epidemiological studies of work related fatalities. The Bureau of

Labor Statistics (BLS) Census of Fatal Occupational Injuries (CFOI) also collects data on

fatal occupational injuries. Unlike the NTOF, the CFOI collects census data through

federal and state injuries and also captures some fatal illnesses, such as heart attacks, that

occur at work. Finally, the National Council on Compensation Insurance (NCCI) collects

and analyzes data from private workers’ compensation insurance providers in 13 states.

As the reliability and validity of the data is based on the confidence interval,

sampling techniques and data collection process, the quality and usefulness of national

databases if often challenged (Murphy et al., 1996). Additionally, these types of

databases are limited to information regarding prevalence and frequency of injury.

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Analyzing Loss Data

Workers’ compensation analysis. Depending on the data available, there are

several statistical measures used to evaluate the outcomes and results of occupational

injuries and illnesses. The Minnesota Department of Labor provides a comprehensive list

of the types of workers’ compensation data that can be analyzed including but not limited

to (a) the number of medical and indemnity worker’s compensation claims paid, (b) paid

workers’ compensation claims per 100 full-time equivalent (FTE) workers, and (c)

average indemnity and medical costs of insured claims. Claims are counted in the year of

injury or onset of illness and are based on the total incurred value as of the date of

analysis. Claim costs are also developed to project the ultimate cost of claims and to

normalize the data (Minnesota Department of Labor and Industry, 2002).

Incidence rates. Occupational Safety and Health (OSHA) incidence rates can

also be used to show the relative level of injuries and illnesses within a single company or

operations within a single company (U.S. Bureau of Labor Statistics, 2001). According

to the BLS, because a common base and a specific period of time are involved, OSHA

rates can define areas of increased injury and illness rates as well as progress in

preventing work-related injuries and illnesses.

The three primary rate calculations performed most consistently by the BLS and

general industry include the Total Recordable Incidence Rate, the Lost Workday Case

Incidence Rate and the Severity Rate. The Total Recordable Incidence Rate measures the

number of full-time employees who have suffered a recordable injury during a given

calendar year. The Lost Workday Case Incidence Rate measures the total number of

cases that involve days away from work, days of restricted work or both. The Severity

20

Rate measures the total number days-away-from-work or restricted work activity days.

All rates represent the number the number of injuries and illnesses per 100 full-time

workers and are calculated as: (N/EH) x 200,000, where N = number of injuries and

illnesses, EH = total hours worked by all employees during the calendar year and 200,000

= base for 100 equivalent full-time workers working 40 hours per week, 50 weeks per

year (Bureau of Labor Statistics, 2001).

Valuing Loss in Business Terms

To align risk control with business operations, the Occupational Safety and Health

Administration (OSHA) (1998) released an interactive software program, "Safety Pays,"

to assist employers in assessing the impact of occupational injuries and illnesses on

company profitability. It uses a company's profit margin, the average costs of an injury

or illness, and an indirect cost multiplier to project the amount of sales a company would

need to generate in order to cover those costs. OSHA used its own figures and those of

the National Safety Council and insurers to determine the cost of abrasions, strains,

fractures, and other injuries and fatalities (OSHA, 1998). In addition to valuing loss in

terms of impact on profitability, many companies also use internal financial indicators

such as cost per part or cost per call to quantify the impact of occupational injuries and

illnesses.

Estimating the Costs and Benefits of Risk Control

In general, a cost-benefit analysis (CBA) quantifies investments in risk control as

current expenditures that can generate a stream of benefits over time (Dorman, 2000).

The net benefits that an investment is expected to generate are generally expressed in

monetary terms and referred to as cost-benefit flows (Kuchler and Golan, 1999). As

21

such, the first step to cost-benefit analysis is to project the costs and benefits associated

with a specific risk control intervention.

Cost of ergonomic intervention. In an effort to gain support for proposed

governmental ergonomic standards over the last several years, detailed analyses to

quantify the cost of formal ergonomic intervention have become more prevalent. In

2000, the Occupational Safety & Health Administration (OSHA) proposed an ergonomic

program rule, estimating costs associated with what OSHA considered to be the essential

elements of an ergonomic program including (a) management leadership and employee

participation, (b) hazard information and reporting, (c) job hazard analysis and control,

(d) training, (e) musculoskeletal disorder (MSD) management and, (f) program

evaluation. Projected costs were based on four categories including (a) familiarization

costs to determine compliance requirements as established by the rule, (b) cost to

implement the basic program, (c) costs to implement the full program and, (d) costs of

job control interventions. Overall, OSHA estimated that the ergonomic standard proposed

in 2000 would cost $700 per establishment covered by the standard and $150 per problem

job fixed.

Similarly, the Washington State Department of Labor and Industries (2000) also

conducted an analysis to project the costs associated with its proposed ergonomic rule in

1999. The Washington State cost projections were based on the time and cost

requirements for businesses to comply with certain elements of the ergonomics rule

including (a) rule review, (b) caution zone job identification, (c) caution zone job

analysis, (d) engineering and administrative controls, (e) awareness education, hazard job

training, (f) training of evaluators, and (g) managerial and administrative time. Total

22

annualized compliance costs for all businesses in the state of Washington were projected

to be $37.77 per employee.

Benefits of ergonomic intervention. Over the last few decades, there has been

substantial literature around the benefits associated with formal ergonomic program

initiatives. Reported benefits include increased productivity, decrease in employee

turnover, reduced absenteeism, increased employee satisfaction, increased work quality,

and decreased number, severity and associated cost of occupational injury and illness

(National Institute of Occupational Safety & Health [NIOSH], 1997). The Occupational

Safety & Health Administration (OSHA), focused on four key benefit measures to project

the estimated benefits of its proposed ergonomic standard, based on a review of

epidemiological and intervention studies. Key measures included injury rates, number of

lost workdays, number of workers’ compensation claims, and cost of workers’

compensation claims. Based on the reviewed studies, OSHA reported an average

reduction in injury rates of 67%, an average reduction in lost workdays of 74%, an

average reduction in the number of workers’ compensation claims of 74% and an average

reduction in the cost associated with workers’ compensation claims of 71%.

Perhaps the most recent, comprehensive summary of the benefits associated with

formal ergonomic intervention was compiled by the Washington State Department of

Labor & Industries (2000) as part of the cost-benefit analysis conducted to support the

Ergonomic Rule proposed in May 2000. The Washington State cost-benefit analysis

cited 62 ergonomic intervention studies covering a variety of industries, study design

types, covered timeframes and observed musculoskeletal disorders. Population among

the studies ranged from 6 employees to 50,000 employees. Overall, the Washington

23

State review reported an average reduction in lost workdays across those studies that

reported results of 65%, an average reduction in number of injuries of 48%, and an

average reduction in total associated health costs of 65%.

Financial Models to Value Risk Control Initiatives

There are various financial models are used to determine the capital value of a

risk control intervention and translate costs into return on investment. Financial models

to value loss and predict the cost effectiveness of risk control investments that involve

significant capital must be 1) precise and accurate, 2) significant to the organization and

3) able to be benchmarked (Dorman, 2000). Financial metrics help to define the impact

of occupational injuries and illnesses on the profitability and the financial impact risk

control decisions (Bjurstrom, 1999).

There are several financial accounting models used to value the costs and benefits

of occupational injuries and illnesses including but not limited to discounted payback

period, net present value and internal rate of return (Nelson and Cook, n.d.). Utilization

of financial accounting methods accomplishes several goals including translating mission

and vision statements into operational terms, integrating risk control with the rest of the

business and linking risk control functions to overall business goals and objectives

(D’Arcy, 2001).

Discounted payback period. The discounted payback period is frequently used as

a capital investment evaluation technique by businesses. Similar to the payback period

model, the discounted payback period method calculates the length of time it takes to

recover the initial cash flow of the investment, and incorporates the time value of money

in the equation (Bhandari, 1986). This method determines the period beyond which an

24

investment will generate economic profit. According to Bhandari (1986), the discounted

payback period is limited by the time needed to “pay” for the investment with discounted

cash flows rather than measuring the return on investment over the life of the investment.

Therefore, the discounted payback period may be better suited for short-term investment

analysis (Nelson and Cook, n.d.).

Net present value. The net present value model (NPV) considers the value of

future cash flows in terms of today’s dollars. Similar to the discounted payback period,

the NPV discounts future cash flows against the cost of capital, or any other rate the user

might prefer, giving a more accurate indication of future savings in terms of today’s

dollars (Nelson and Cook, n.d.). If the net present value of the cash inflows are greater

than the net present values of the cash outflows i.e. a “positive” NPV indicating that the

benefits exceed the cost, the investment is acceptable. Conversely, a negative NPV

indicates that the costs exceed the benefits (Kuchler and Golan, 1999). Net Present Value

is very useful as it considers both the time value of money and future cost-benefit flows,

however, it is more difficult to calculate than the discounted payback period (Nelson and

Cook, n.d.).

Internal rate of return. The internal rate of return (IRR) is the third more widely

accepted way of determining the efficiency of an investment. In general, the internal rate

of return is the total interest yield generated by an investment over its life (Baker, 1997-

2000). According to Nelson and Cook (n.d.), it can be more specifically defined as the

discount rate that results in the equalization of the present value of the cash outflows and

the present value of the cash inflows. The IRR is similar to the discounted payback period

and the net present value methods in that it also considers the time value of money

25

(Nelson and Cook, n.d.). According to Brigham (1988), the IRR has limited application,

as it is difficult to calculate. Additionally, the IRR is based on the assumption that the

company has the opportunity to reinvest the cash generated at the internal rate of return

rather than at the cost of capital which implies that the cost-benefit flow is equally

dependent on the timing of the investment (Kuchler and Golan, 1999).

Summary

According to Dorman (2000), “occupational injuries and illnesses are matters of

health, but they are also matters of economics, since they stem from work, and work is an

economic activity.” Today’s businesses make operational investment decisions based on

economic theory. Translated to risk management, an employer will make the decision to

implement a risk control intervention only if the cost of not doing so exceeds the cost of

prevention (Shapiro, 1999).

There are several steps involved with measuring the costs and benefits involved

with a specific risk control intervention. The first decision that analysts must make is to

define the types of costs that will be isolated, and what unit of measurement will be used

(Kuchler and Golan, 1999). To provide an effective incentive for the implementation of a

risk control intervention, costs must be economic, internal, variable, and visible (Dorman,

2000). The second step is to calculate the economic costs for the types of injuries and

illnesses selected, based on the definition criteria established in the first step. A more

comprehensive economic cost analysis including multiple data sources will create a more

complete, accurate picture of the current problem. Finally, applying a proposed risk

control investment based on projected costs and benefits to a financial model that predicts

the cost-effectiveness of implementation and can be measured against other business

26

investment opportunities allows decision-makers to anticipate the maximum rate of return

(Kuchler and Golan, 1999).

27

Chapter 3

Methodology

Method of Study

The primary objective of this descriptive study was to translate the cost of

occupational injury and illness into an operationally based, financial cost-benefit model

that can be used to support an ergonomic risk control intervention within the Uniprise

business segment of UnitedHealth Group. The methodology to achieve this objective can

be categorized into four general sections: (a) identifying and quantifying the historical

cost of occupational injury and illness, (b) translating related costs into business-based

economic measurement criteria to effectively define the impact on profitability, (c)

projecting the estimated costs associated with an ergonomic program intervention, and

(d) proposing a cost-benefit financial model to estimate the return on a risk control

initiative. The Review of Literature helped to determine the scope of this study by

analyzing the types of related costs to be considered, reviewing methods of translating

costs into business terms, researching cost and benefit statistics associated with

ergonomic interventions, and identifying various financial models to translate costs and

benefits into business terms.

Outline of Methodology

I. Target population. The Uniprise business segment of UnitedHealth Group was

chosen as a target population for this study based on its size, employee population

and contribution to UnitedHealth Group’s overall workers’ compensation

experience.

28

II. Historical cost of occupational injuries. The costs of occupational injuries and

illnesses were limited to developed, direct costs associated with workers’

compensation claims as well as additional administrative costs to associated with

managing and maintaining the workers compensation program. Data collection

and analysis was limited to occupational injury and illness data from January 1,

1999 through April 30, 2002. More current data was chosen to more accurately

reflect the organizational changes that have occurred since 1998.

A. Workers compensation injury analysis. Data was collected from two primary

databases linked to two third party administrators that managed claims during

the specified time period. Analyzed data was specific to the Uniprise business

segment with some comparison to UnitedHealth Group overall experience.

Key indicators included incidence data, severity measured in terms of lost

time and overall financial impact, and descriptive data.

B. Administrative cost assessment. Overhead costs associated with the

administration of the workers’ compensation program including claims

processing and administration fees, payment for the waiting period prior to the

onset of workers’ compensation coverage, and internal risk management

salaries. A portion of the measured costs was attributed to the Uniprise

business segment based on historical claims experience.

III. Cost impact on profitability. The direct cost of occupational injuries and illnesses

were translated into impact on profitability within Uniprise using 2001 as the

most recent, complete year. Impact on profitability was calculated by using the

profit margin to determine the actual cost of injuries in terms of the additional

29

revenue needed to pay for the injury during a specified time period. Average

medical-only claim cost, average lost time claim cost, and average cost for

cumulative trauma disorder were considered.

IV. Cost-benefit analysis model. The UnitedHealth Group cost-benefit analysis

model was used to estimate the return on investment of a risk control program.

Key components of the combination net present value/internal rate of return

model included project cost estimation, assumptions, estimated savings associated

with the project and return on investment calculations.

A. Project cost estimation. The cost of a risk control intervention related to the

prevention of cumulative trauma injuries was estimated by quantifying

required resources including personnel, training, and furniture and equipment

needs. The general procedure used to estimate the costs for the intervention

was modeled after the Cost Benefit Analysis of the Ergonomic Standard

conducted by the Washington Department of Labor and Industries in May

2002. Estimates were based on Uniprise Production and Service division

population and were not considered to be indicative of a comprehensive

program but rather an initial, three-year phase of implementation.

B. Estimated project savings. Estimated projected savings were quantified in

terms of the reduction in the number of related injuries and illnesses.

Estimated savings or benefits associated with an ergonomic risk control

intervention were also modeled in part after the Cost Benefit Analysis of the

Ergonomic Standard conducted by the Washington Department of Labor and

Industries in May, 2002. The average cost of medical claims and average cost

30

of lost time claims were used as baseline expenditures. Administrative costs

were also applied as a percent of total costs per claim.

C. Internal rate of return calculation. The projected internal rate of return was

calculated to determine the interest rate that is equivalent to the monetary

return or savings expected from the risk control intervention. The internal rate

of return was compared with current investment rates to determine if the

intervention as defined in the cost-benefit analysis would be considered

acceptable in financial terms.

31

Chapter 4

Results and Discussion

Summary of Methods Used

The methodology used to accomplish this study included identifying and

quantifying the historical cost of occupational injury and illness, translating related costs

into impact on profitability, projecting the estimated costs associated with an ergonomic

program intervention, and applying UnitedHealth Group’s cost-benefit financial model to

estimate the return on a risk control initiative aimed at reducing the occurrence of

cumulative trauma injury and illness. First, a target population was chosen, based on the

size of the business segment and the overall contribution to UnitedHealth Group workers’

compensation costs. Next, the types of costs associated with occupational injury and

illness were selected and analyzed, based on their ability to be isolated and monetarily

quantified. Total costs were then translated to impact on productivity and profitability

within the Uniprise business segment, focusing on key production standards within the

Production and Service divisions. Finally, the estimated costs and benefits of an

ergonomic program were applied to a financial model to determine the internal rate of

return.

Target Population

UnitedHealth Group has approximately 29,845 employees throughout the United

States, housed in six business segments, each operating as independent companies with

separate financials. Uniprise is the largest business segment of UnitedHealth Group with

approximately 10,152 employees nation-wide. As the largest business segment, Uniprise

also significantly contributes to overall workers’ compensation costs on an annual basis.

32

Since 1999, Uniprise has contributed over 33% of the total number of reported workers’

compensation claims for UnitedHealth Group and over 41% of the total cost of injuries,

accounting for $4,909,453 in developed medical and indemnity costs.

Of the total Uniprise population, 6192 or 61% of the employees currently reside

in two divisions, Production and Service. Correspondingly, Uniprise Production and

Service divisions have contributed 44% of reported claims and 58% of the total cost of

Uniprise occupational injuries and illnesses since 1999, accounting for $3,548,769 in

related costs which represents over 35% of UnitedHealth Group’s total cost. Based on

the large employee population as well as the contribution to overall workers’

compensation costs, Uniprise was chosen as the target population for this study, with

special emphasis on the Production and Service divisions.

Workers’ Compensation Loss Trend Analysis

A data file containing Uniprise workers’ compensation experience for the

experience period 1/1/99 - 4/30/02 was prepared by consolidating information from the

Travelers Insurance Company (TIC) Risk Management Insurance System (RMIS)

database from 1/1/99 – 2/28/00 and the Crawford & Company RMIS database from

3/1/00 to 4/30/02 for analysis. Information from both databases was cross-referenced

with the UnitedHealth Group human resources database to obtain specific business

segment, unit, function, and job classification information. The intent of the analysis was

to determine the total number of claims that have incurred cost, total cost and distribution

of claims and injury types as they relate to the Uniprise business segment. The goal was

to quantify the costs associated with workers’ compensation claims and determine

predominant injury types by functional division.

33

Number and cost of claims. Table I represents the annual number of Uniprise

workers’ compensation claims that resulted in incurred cost and the total cost of claims

through 4/30/02 as of 5/21/02. Costs reflect the total amount incurred including paid and

reserved medical expenses, indemnity expenses and ancillary expenses such as legal fees

charged to the claims files. Zero-dollar or “incident only” claims were excluded from the

analysis. Claims reported in 2002 were annualized and industry development factors were

applied to each year to project the ultimate cost of claims.

The number of reported claims has decreased by a greater margin each year from

5% in 2000, 10% in 2001 to a projected 27% in 2002 while the cost of claims has

fluctuated since 1999 with a high projected in 2002 of $2,151,803. The Occupational

Safety and Health (OSHA) Recordable Incidence Rate was also calculated to apply hours

worked as a common denominator. The OSHA Recordable Incidence Rate also reflects a

decrease in the number of recordable incidents over the measured period.

Table I

Uniprise Annual Number and Cost of Injuries

Fiscal Year 1999 2000 2001 2002

Number 196 187 168 165

Total Cost $1,296,372 $1,650,770 $1,011,827 $2,151,804

Recordable

Incidence Rate 1.74 1.59 1.40 1.25

Note. Occurrence and cost data for 2002 was annualized and industry development

factors were used to project the ultimate cost of claims. Development factors were

1.151391, 1.238315, 1.484429, and 4.264578 from 1999 to 2002 respectively.

34

Annual number and cost by division. Table II represents the total number and

cost of reported claims for the six leading functional divisions of Uniprise in aggregate

over the total period measured. The six divisions represented account for over 87% of

the total number of reported injuries and illnesses. Combined, the Production and

Service divisions account for 44% of reported occupational injury and illness and 58% of

the total cost after development. The Operations division has contributed 21% of

reported claims and 18% of the total cost of injuries, however losses have been trending

dramatically downward since 1999 with 80% of the claims occurring in 1999 and 2000.

The number and cost of injuries and illnesses within the Production and Service divisions

have been steadily increasing since 1999 with 70% of claims occurring in 2001 and 2002.

Table II

Uniprise Number and Cost by Functional Division

Division Number % Total Cost % Total

Operations 150 21 $1,112,576 18

Government 63 9 $420,586 7

Production 135 19 $2,135,273 35

Technologies 20 3 $105,190 2

Service 178 25 $1,413,496 23

Finance 79 11 $590,660 10

Note. Occurrence and cost data for 2002 was annualized and industry development

factors were used to project the ultimate cost of claims. Development factors were

1.151391, 1.238315, 1.484429, and 4.264578 from 1999 to 2002 respectively.

35

Number and cost by injury cause. Table III represents the number and cost of

occupational injury and illness by the leading six major cause of injury including average

costs per injury in each category. Slips, trips and falls (STF) and cumulative trauma

disorders (CTD) account for over 73% of reported occupational injuries and illnesses and

over 78% of the total developed cost. Cumulative trauma disorders alone contributed

over 61% of the total cost of claims. The average cost of a cumulative trauma disorder is

$11,702.

Table III

Uniprise Number and Cost by Injury Cause

Injury Cause Number % of Total Cost % Total Avg. Cost.

STF 267 37 $1,772,041 29 6,637

CTD 257 36 $3,007,376 49 11,702

Struck By 47 7 $731,770 12 15,570

Lifting 47 7 $397,218 7 8,451

Chemical 23 3 $84,790 1 3,687

Reaching 21 3 $42,817 1 2,039

Note. Occurrence and cost data for 2002 was annualized and industry development

factors were used to project the ultimate cost of claims. Development factors were

1.151391, 1.238315, 1.484429, and 4.264578 from 1999 to 2002 respectively.

Number and cost by injury cause for Production and Service. Table IV represents

the number and cost of claims by the leading six injury causes for the Production and

Service divisions of Uniprise, accounting for almost 95% of reported claims and almost

100% of the cost. Slips, trips and falls and cumulative trauma disorders account for 75%

36

of total claims and almost 78% of the cost. Cumulative trauma disorders alone account

for 45% of the cost of occupational injuries and illnesses, averaging $16,904 per claim.

Table IV

Production and Service Number and Cost by Injury Cause

Injury Cause Number % of Total Cost % Total Avg. Cost.

STF 141 45 $1,160,925 33 $8,234

CTD 95 30 $1,605,921 45 $16,904

Struck By 29 9 $504,168 14 $17,385

Chemical 14 4 $78,505 2 $5,608

Lifting 10 3 $182,256 5 $18,226

Reaching 8 3 $7,563 0 $945

Note. Occurrence and cost data for 2002 was annualized and industry development

factors were used to project the ultimate cost of claims. Development factors were

1.151391, 1.238315, 1.484429, and 4.264578 from 1999 to 2002 respectively.

Average cost of injuries. Table V represents the average cost of medical,

indemnity and cumulative trauma disorders by year. The average cost of medical claims

had increased by 26% from 1999 to 2000 and 2000 to 2001. Based the annualized and

developed claims in 2002, the cost is anticipated to increase even more substantially.

Average cost of indemnity claims has fluctuated since 1999, as has the average cost of

cumulative trauma disorders with highs projected in 2002.

37

Table V

Uniprise Average Cost of Injuries by Claim Type

Claim Type 1999 2000 2001 2002

Medical Only $819 $1,108 $1,507 $4,984

Indemnity $24,483 $39,098 $17,999 $49,298

CTD $24,513 $34,686 $23,440 $47,662

Note. Occurrence and cost data for 2002 was annualized and industry development

factors were used to project the ultimate cost of claims. Development factors were

1.151391, 1.238315, 1.484429, and 4.264578 from 1999 to 2002 respectively.

Administrative Cost Assessment

UnitedHealth Group maintains a self-insured workers’ compensation program and

currently contracts with a third party administrator to manage related claims. While the

costs presented in the workers’ compensation database contribute to a substantial portion

of the total direct cost of occupational injury and illness, there are additional

administrative costs associated with maintaining the workers’ compensation program that

are not reflected in the database and are billed separately. These additional

administrative costs include employee salary to manage the program, payment of the

waiting period before workers’ compensation benefits ensue as well as unallocated costs

charged by the third party administrator for various administrative services and expenses.

UnitedHealth Group employs one person to oversee the workers’ compensation

program at a salary of $67,500. At a 33 % allocation rate based on the number of

occupational injuries and illnesses, $22,275 can be attributed to the Uniprise business

segment on an annual basis. In addition to the salary devoted to managing claims,

38

UnitedHealth Group also incurs the expense associated with the waiting period before

indemnity benefits are allocated to the claim file. The waiting period varies by state

however an average of three days was used to project associated costs based on the

number of indemnity claims. For the year 2001, Uniprise experienced 46 indemnity

claims. At an average daily wage of $100, projected lost time costs associated with the

waiting period were conservatively estimated at $13,800. Lastly, there are three flat-rate

fees associated with claims administration including a $20 per claim intake fee, a $90 per

medical only claim fee, a $925 per indemnity claim fee, and an annual $9,600 general

administrative fee. Using the 2001 fiscal year as an example, ancillary fees contributed

an additional $13,420 to the total cost of medical claims, $44,712 to the total cost of

indemnity claims and $3,168 to general claims administration. Overall, an estimated

$97,375 in additional total administrative costs were added to the 2001 loss year to

project ultimate claim costs at $1,109,202.

Impact on Profitability. To translate the loss to Uniprise into business terms, the

direct costs of occupational injuries and illnesses for the 2001 fiscal year were applied to

the operating margin for 2001. At an operating margin of 15.2%, $1,109,202 in loss

would require an additional $7,297,382 in revenue to compensate for the additional

expense.

Cost-Benefit Analysis

Based on the number and cost of injuries within the Uniprise business segment, an

ergonomic program was chosen as the proposed risk control intervention. The

UnitedHealth Group cost-benefit analysis model was used to estimate the return on

39

investment of the ergonomic program by estimating the cost of the intervention, the

savings associated with the intervention and calculating the internal rate of return.

Projected cost of intervention. The general procedure used to estimate the costs

for the intervention was modeled after the Cost Benefit Analysis of the Ergonomic

Standard prepared by the Washington Department of Labor and Industries (2002). The

Washington State analysis included the following components to calculate the unit

control cost by standard industrial code (SIC): (a) basic ergonomic education given to

employees in the selected target population, (b) training for managers or supervisors

conducting job analysis or hazard job training, (c) job analysis, (d) engineering and

administrative controls to reduce related hazards, (e) protective equipment to reduce

related hazards, and (f) managerial and administrative time required to oversee and

evaluate the ergonomic program.

Based on the number and cost of cumulative trauma disorders, the Production and

Service divisions of Uniprise were chosen as the target population for the risk control

intervention, representing 6,192 employees. The Washington State analysis calculated

the unit control cost by standard industrial code for each component of the program.

Falling under SIC 6321, Table VI represents the unit control and total control costs of a

related risk control intervention within the Production and Service divisions of Uniprise,

based on projected key components.

40

Table VI

Key Component Unit Control Costs for Production and Service

Key Component Cost per employee Number employees Total unit cost

Basic ergonomic

education

$12.96 6192 $80,248

Train the trainer and

job analyst training

$1.25 6192 $7,740

Job analysis costs $0.97 6192 $6006

Engineering and

administrative

controls

$8.10 6192 $50,155

Protective

equipment

$0.51 6192 $3,158

Managerial and

administrative costs

$2.44 6192 $15,108

Total $15.20 6192 $156,118

The Washington State elemental, cost estimates were annualized over 10 years for

engineering and administrative controls and over 3 years for education and training costs.

A 5% discount rate was used in the process to discount future costs and benefits.

Training costs were estimated to occur in the first year and every three years thereafter.

Job analysis costs were applied over three years as were managerial and administrative

costs. Engineering controls and protective equipment costs were allocated over three

years with heavy emphasis on the first year of implementation. In addition to the

41

$204,643 associated with the specific components of the intervention, it was assumed that

training would be provided internally by UnitedHealth Group Risk Management, adding

$9,250 to the total cost of intervention (see Appendix A for project cost estimation).

Projected savings from intervention. Estimated savings or benefits associated

with an ergonomic risk control intervention were also modeled in part after the Cost

Benefit Analysis of the Ergonomic Standard conducted by the Washington Department of

Labor and Industries in May, 2002. Projected savings were based on the impact on direct

workers’ compensation claim costs associated with the decrease in cumulative trauma

disorders that are anticipated to follow the reduction or elimination of related hazards in

the workplace. The value of lost output was limited to the average costs associated with

workers’ compensation claims based on developed data from the 2001 fiscal year as the

most recent, whole year.

Based on an extensive literature search around the effectiveness of ergonomic

interventions and the risk of injury from exposure to ergonomic risk factors, the

Washington State Department of Labor estimates that compliance with the ergonomics

rule will prevent 40% of workplace musculoskeletal injuries and 50% of related costs.

As only certain elements of the rule were applied to the cost projection for Uniprise, more

conservative estimates, a 25% reduction in the number of reported claims, and a 30%

reduction in cost, were used to project the associated benefits. Based on the 2001

workers’ compensation experience, the Production and Service divisions of Uniprise

experienced 23 claims associated with cumulative trauma disorder accounting for

$287,809 of direct costs, including a 14% allocation of administrative costs, based on the

number of reported claims. A related risk control intervention was projected to result in a

42

reduction of 6 injuries and $86,343 in costs on an annual basis, based on percent of total

costs. Based on the average cost of cumulative trauma disorder for 2001, $23,440, the

estimated cost reduction was measured at a more aggressive $140,640. Estimated

savings were projected over three years, resulting in total savings of $259,029.

Return on investment. The UnitedHealth Group cost-benefit model was used to

measure the net present value and the internal rate of return of the risk control initiative

based on the estimated costs and savings. Assumptions included a 13% Discount Rate, a

38% Tax Rate, a three-year Tax Depreciation Life and a five-year Book Depreciation

Life. Project costs were estimated to be $213,893 over a three-year implementation

period. Project savings were estimated to be $259,029 over the same period. Based on

the assumptions and the cost-benefit model, total Net Present Value of the risk control

intervention was calculated at $8,931 and the Internal Rate of Return was calculated at

28.87%. A positive Net Present Value and Internal Rate of Return indicated a positive

return on investment (see Appendixes A and B for the detailed cost-benefit model).

Results

Goal one. The first goal of this study was to conduct an analysis of Uniprise

workers compensation claims to determine the distribution of claims and injury types and

to quantify the costs associated with workers’ compensation claims by predominant

injury types and functional division. Uniprise workers’ compensation claims data from

1999 through April 2002 was obtained and analyzed by (a) annual number of reported

claims and cost, (b) annual number of reported claims and cost by functional division, (c)

number of reported claims and cost by injury cause, (d) number and cost by injury cause

and functional division, and (e) average cost of injury by claim type. Uniprise has

43

experienced a decrease in the the number of reported claims of claims since 1999

however cost has fluctuated annually. Cumulative trauma disorders contributed over

61% of the $4,909,453 in total developed claims cost incurred since 1999. The

Production and Service divisions within Uniprise contributed 44% of total occupational

injury and illness reported and 58% of the total cost after development during the same

time period.

In addition to costs reflected in the workers’ compensation database, ancillary

expenses associated with managing and administering the workers’ compensation

program were calculated, using 2001 as the most recent full year of claims. Additional

costs allocated to the Uniprise 2001 loss year included $22,275 in salary costs, $13,800 in

loss time costs, and $61,300 in claims handling fees, totaling $97,375, bringing the total

cost of claims for the year to $1,109,202.

Goal two. The second goal of this study was to quantify the operational impact of

occupational injuries and illnesses by calculating the impact on profitability. Based on

the 2001 operating margin of 15.2%, it was determined that an additional $7,297,382 in

revenue was required to compensate for losses incurred during that year.

Goal three. The final goal of this study was to estimate the costs and benefits

associated with a risk control intervention and apply a financial model to project the

anticipated return on investment. Costs and benefits of the ergonomic risk control

intervention were estimated based on the Cost Benefit Analysis of the Ergonomic

Standard conducted by the Washington Department of Labor and Industries in May,

2002. Total costs were estimated at $213,893 while total benefits or savings were

44

estimated at $259,029, resulting in a projected, positive return on investment when

applied to the UnitedHealth Group Cost-Benefit Analysis model.

Summary

The cost of occupational injuries and illnesses to the Uniprise business segment is

sizable. On average, workers’ compensation claims have cost Uniprise $1,527,693 a year

since 1999, translating to $8,274,296 in annual replacement revenue required to

compensate for the loss. The actual cost to Uniprise and UnitedHealth Group is actually

even higher when ancillary expenses such as loss time and claims administrative fees are

considered.

When applied to the UnitedHealth Group financial model, the costs and benefits

of a risk control intervention to reduce the number and cost of employee injury and

illness demonstrated a positive Net Present Value and Internal Rate of Return, indicating

a financially feasible investment. The ultimate direct cost of occupational injuries and

illnesses, the impact of related loss on profitability and the positive cost-benefit analysis

can be used to develop a business case for a formal risk control intervention.

45

Chapter 5

Summary, Conclusions, and Recommendations

Summary

Problem. Given the focus on reducing operating expenses within UnitedHealth

Group, the speculation of potential benefits associated with proposed risk control

initiatives are insufficient to financially justify related interventions. While

UnitedHealth Group does have a cost-benefit model used to justify capital expenditures,

it has not been used as a formal system to cost-justify risk control initiatives. To

effectively propose and gain support for a risk control initiative focused on the reduction

of occupational injuries and illnesses associated with cumulative trauma within the

predominant contributing business segment, Uniprise, it is necessary to first establish a

clear, standardized method of quantifying the financial impact of injury. The estimated

costs and benefits associated with a related risk control intervention must then be applied

to a business-based cost-benefit model to determine the financial feasibility of

implementation.

Purpose and goals of research. The purpose of this study was to develop a

comprehensive, business-based cost impact analysis focused on cumulative trauma

disorder that adequately represents the direct cost of injuries to Uniprise and can be used

in conjunction with a cost-benefit model to determine the financial feasibility of a formal

ergonomic intervention within the Production and Service divisions of Uniprise. The

goals of this study were threefold:

1. Conduct an analysis of Uniprise workers compensation claims to determine

the distribution and cost of claims and injury types as they relate to the

46

Uniprise business segment and to quantify the total direct costs associated

with workers’ compensation claims by predominant injury types and

functional division.

2. Quantify the operational impact of occupational injuries and illnesses by

translating costs into key operational standards within the Production and

Service divisions of Uniprise and calculating the impact on profitability.

3. Estimate the costs and savings of a formal ergonomic intervention within the

Production and Service divisions of Uniprise and apply those estimates to a

cost-benefit model to project the return on investment.

Background and significance of research. Since 1999, Uniprise has contributed

over 33% of the total workers’ compensation claims that have occurred within

UnitedHealth Group and over 41% of the total cost of claims, accounting for $4,909,453

in direct costs. Of the total contribution, 36% of the total number reported and 44% of the

severity can be attributed to cumulative trauma disorder, accounting for $2,143,558 in

direct costs. Two divisions within Uniprise, Production and Service, have contributed

45% of total claims and 51% of the total severity of injuries and illnesses, accounting for

$2,497,682.

The Production and Service divisions of Uniprise present significant risk factors

for cumulative trauma disorder, most predominantly the highly repetitive nature of claims

management and customer service activities. As Uniprise continues to refine its key

business processes to reduce operating costs, fewer employees will be expected to

contribute greater productivity, while maintaining or improving quality, further

increasing the risk for injury.

47

The concept of defining and categorizing costs has evolved and become more

diversified over the last several decades in an effort to more accurately quantify the

impact of occupational injuries and illnesses. As key decision-makers within businesses

respond to economic motivation, applying an operationally based economic cost structure

to risk control allows risk control interventions to mirror the management decision-

making process (Dorman, 2000).

Research design. The primary objective of this field problem was to translate the

cost of occupational injury and illness into an operationally based, financial cost-benefit

model that can be used to support risk control intervention within the Uniprise business

segment of UnitedHealth Group. The methodology used to accomplish the objective

included: (a) identifying and quantifying the historical distribution and cost of

occupational injury and illness, (b) translating related costs into business-based economic

measurement criteria to effectively define the impact on profitability, and (c) proposing a

cost-benefit financial model to estimate the return on a risk control initiative. The

Review of Literature helped to determine the scope of this study by analyzing the types

of related costs to be considered, reviewing national databases for broader scope

comparison and identifying various financial models to translate costs and benefits into

business terms.

Conclusions

Goal one. The first goal of this study was to conduct an analysis of Uniprise

workers compensation claims to determine the distribution and cost of claims by

predominant injury types and functional divisions. Uniprise workers’ compensation

claims data from 1999 through April 2002 was obtained and analyzed by (a) annual

48

number of reported claims and total cost, (b) annual number of claims and total cost by

functional division, (c) annual number of claims and total cost by injury cause, (d) annual

number of claims and total cost by injury cause and functional division, and (e) average

cost of injury by claim type. Uniprise has experienced a decrease in the number of

reported claims since 1999 however the cost of claims has fluctuated annually.

Cumulative trauma disorders were the leading cause of injury within Uniprise,

contributing over 61% of the $4,909,453 in total claims cost incurred since 1999. The

Production and Service divisions within Uniprise contributed 44% of reported claims and

58% of the total cost after development during the same time period.

Given the absence of a formal risk control program within Uniprise, the reduction

in total number of claims on an annual basis since 1999 cannot be attributed to proactive

intervention. Based on the distribution and cost of claims by injury cause, I conclude that

a risk control intervention focused on the reduction of cumulative trauma disorders within

the Production and Service divisions of Uniprise would have the greatest impact on the

reduction of costs associated with occupational injuries and illnesses.

In addition to costs reflected in the workers’ compensation database, ancillary

expenses associated with managing and administering the workers’ compensation

program were calculated, using 2001 as the most recent full year of claims. Additional

costs allocated to the Uniprise 2001 loss year included $22,275 in salary costs, $13,800 in

loss time costs, and $61,300 in claims handling fees, totaling $97,375, bringing the total

cost of claims for the year to $1,109,202.

For the year 2001, ancillary expenses as calculated in this study contributed

almost 9% of the total cost of workers’ compensation for Uniprise. This number is

49

underestimated in that certain unallocated expenses were excluded based on inability to

attain and apportion. While ancillary expenses significantly contribute to the overall cost

of workers’ compensation, they are not currently included in UnitedHealth Group’s cost

allocation process. Therefore, it can be concluded that Uniprise is aware of, and

financially responsible for, only a portion of the costs generated from occupational

injuries and illnesses.

To expand further, only direct costs such as workers’ compensation costs and

administrative costs that were readily attainable and quantifiable were included in this

study. A vast quantity of research supports that indirect costs such as lost production,

employee turnover, replacement costs, etc., can far exceed direct costs. Based on

supporting literature, I conclude that the costs as identified in this study are substantially

underestimated.

Goal two. The second goal of this study was to quantify the operational impact of

occupational injuries and illnesses by calculating the impact on profitability. Based on

the 2001 operating margin of 15.2%, it was determined that an additional $7,297,382 in

revenue was required to compensate for losses incurred during that year.

While $7,297,382 in additional revenue to compensate for Uniprise 2001

occupational injuries and illnesses is substantial, it does not adequately illustrate the

impact on Uniprise operations. I found that as a service organization, Uniprise measures

business impact in terms of productivity including number of calls serviced and number

of claims paid in a specified time period. Therefore, I conclude that in addition to

showing impact on revenue, the cost of occupational injuries and illnesses in terms of

impact on productivity would provide a more meaningful measure.

50

Goal three. The final goal of this study was to estimate the costs and benefits

associated with a risk control intervention and apply a financial model to project the

anticipated return on investment. Costs and benefits of the ergonomic risk control

intervention were estimated based on the Cost Benefit Analysis of the Ergonomic

Standard conducted by the Washington Department of Labor and Industries in May,

2002. Total costs were estimated at $213,893 while total benefits or savings were

estimated at $259,029.

Based on the positive return on investment resulting from the application of the

UnitedHealth Group Cost-Benefit model, I conclude that a formal ergonomic risk control

intervention would be a profitable investment for Uniprise.

Recommendations

1. The Uniprise business segment of UnitedHealth Group should consider

implementing a pilot ergonomic risk control intervention to target the reduction of the

number and severity of occupational cumulative trauma disorders. While the cost-benefit

analysis used in this study supports the implementation of a related risk control

intervention, projected costs and benefits are based on research conducted by the

Washington State Department of Labor rather than internal measures. A pilot program

within Uniprise would allow a more accurate projection of the costs associated with

implementation as well as the ultimate benefits derived from the intervention.

2. According to the research associated with quantifying loss, indirect costs can

far exceed the direct cost of injury. In this study, the cost of occupational injury and

illness was limited to direct costs associated with workers’ compensation claims,

significantly underestimating the total impact of loss. To accurately project the ultimate

51

costs associated with occupational injury and illness, indirect costs must be identified and

quantified.

3. Sole use of the workers’ compensation database information provides an

inadequate representation of injury exposure and incidence. In this study, only those

claims that incurred costs were used to analyze the cost of injury however on average, 62

zero-dollar incidents are reported each year. Additionally, many symptoms of

cumulative trauma go unreported or are filed with personal health insurance providers.

To obtain an accurate picture of loss exposure associated with cumulative trauma

disorders, reported symptoms as well as short-term and long-term disability statistics

must be considered.

4. The risk control benefits as projected in this study are underestimated in that

they only consider reduction in the number and severity of related injuries. To accurately

predict ultimate financial profitability associated with a specific risk control intervention,

savings must be quantified in terms of bottom line dollars by considering impact on

productivity, absenteeism and turnover. These statistics are can be captured through

standard management systems.

5. The impact of injuries on Uniprise profitability was calculated using the

operating ratio as the key financial indicator. To more specifically translate the bottom

line impact of occupational injury and illness into business terms, costs should be related

additional financial indicators, specific to the Production and Service divisions of

Uniprise.

6. Currently, costs associated with occupational injuries and illnesses are

allocated to business segments based on a historical three-year loss ratio and are limited

52

to the incurred direct costs as quantified in the workers’ compensation database.

Administrative costs are considered overhead and are not allocated back to the segments.

More detailed accounting methods to capture direct and indirect cost information applied

to a more thorough cost allocation system should be implemented to create more

incentive to reduce costs through risk control.

53

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Appendix A

Summary of Project Costs

59

Appendix B

Total Project Costs